The Survivor's Club

THE YEAR WAS ONE of great uncertainty in business and of wide fluctuations in security prices." That sentence could have been pulled from the first draft of a 2004 report to investors. Indeed, it is the opening sentence of a mutual fund's report to shareholders. But it's dated Jan. 7, 1931, and the "uncertainty"
Tri-Continental's
investment team referred to was the aftermath of the Crash of 1929.

Tri-Continental, a closed-end mutual fund, survived the chaos that followed the stock-market disaster, the decade-long Depression of the 1930s and, along with a handful of other closed-ends that made their debut in the giddy investment environment of the 1920s, still exists today. (Eerily, its portfolio manager, J.&W. Seligman, even favors some of the same big stocks, including
General Electric,
that Tri-Continental did nearly 75 years ago, nestling them, cheek-by-jowl, alongside upstarts like
Microsoft
and
Wal-Mart.
)

The funds that survived the Great Crash are members of an elite group that can be dubbed the Survivors' Club. They've experienced world war and cold war, boom and bust cycles (several of them), as well as painfully long bear markets and sudden stock-market shocks -- like the crashes of 1987 and 1989. In the 1930s and 1940s, they fought regulatory battles to survive, and in the 1980s and 1990s through today, they battled competitors such as open-end mutual funds and exchange-traded funds for investors' attention and dollars.

"I don't know how we survived; we shouldn't even have made it through the 1930s in one piece," says Wilmot Kidd, who has managed one of this select few,
Central Securities,
for nearly 31 years. Kidd is a charter member of the lunch club formed in 1974, at which Survivors' Club members meet -- along with other closed-end fund managers -- every three months to discuss their common experiences and challenges.

Closed-end funds -- whose shares, unlike those of open-ends, can be bought or sold at any time during the trading day and often trade at a discount or premium to the worth of their underlying holdings -- were all the rage on Wall Street in the 1920s. As brokers allocated stock deals to their circle of friends and family, the funds became the primary vehicle that allowed Joe Public to get a piece of the action on Wall Street.

According to the Securities and Exchange Commission, some 770 investment trusts, as they were then known, were spawned in the years leading up to the crash, including 265 in 1929 alone. That autumn, 75 years ago, Herbert Hoover sat in the White House, the Philadelphia Athletics captured the World Series and the Dow Jones Industrial Average began its relentless slide, culminating in the bloodbath of Black Tuesday, Oct. 29, 1929. By the time the Dow finally touched bottom in July 1932, it had plunged 89% from its September 1929 high. Only 46 of the 770 investment trusts survived the rout and the Depression, says Douglas Ober, chairman and chief executive of
Adams Express,
a closed-end fund launched in October of 1929, and its sister fund,
Petroleum & Resources,
which made its debut at about the same time.

"Some of it was sheer, blind luck. Frankly, I think we survived simply because we didn't have time to get all our cash into the market before it crashed, or to pile on the leverage," Ober says. Only the seventh chairman of the 150-year-old company since its transformation from a Pony Express-style parcel-delivery outfit into an investment firm in 1929, Ober has studied the fate of some of Adams Express' peers.

"A lot of them basically discovered that their portfolios were worthless, and they just shut their doors," he says. Some, like the
Goldman Sachs
Trading Corp., came to grief through a pyramid structure, spawning other investment trusts which ended up holding large stakes in each other. When the market collapsed, so did this structure, and shares in the fund, sold to the public for $104 apiece, were fetching $1.75 at the time of 1932 Senate hearings on the Crash.

Perhaps needless to say, the Goldman Sachs fund didn't last long past that. The funds that did endure seem to have had luck on their side. Some hadn't had time to invest, and had cash on their books, rather than worthless stock. Many collapsed under a load of debt -- just as individual investors bought funds on margin, so the funds themselves borrowed in order to acquire more stock -- others escaped that fate, or were able to cope with it.

General American Investors,
for instance, was launched just in time to capture the height of the stock mania, raising $9.3 million in January 1927 -- of which $7.5 million was debt. A little more than a year later, Second General American Investors made its debut, raising another $15 million -- of which $10 million came from preferred stock. Fortuitously, the two funds, which merged in September 1929 just as stock prices began to fall, had enough cash to buy back the debt they had issued. And they were able to do so at well below the issue price and well below par. "That probably saved the day; I wouldn't be sitting here today if that hadn't happened," says Eugene DeStaebler, the fund's vice president of administration, sitting at his midtown New York office and studying an array of old stock certificates and debentures issued by the fund at its inception.

General American, the oldest member of the Survivors' Club, thrived in the decades that followed. It snapped up high-grade railroad bonds in the 1930s, and collected hefty dividends from those holdings and, later, from petroleum and industrial investments. In 1946, its assets totaled $37.2 million. Today, it has $1.2 billion under management, including $200 million in preferred stock.

Returns? While many mutual funds welcome the day when they can boast about a five- or ten-year record of beating the Standard & Poor's 500, General American, DeStaebler says, can point to an average annualized return of 12.7% over 77&frac12; years, before expenses, compared to 10.3% for the S&P.

Moving into a new millennium, these companies face a host of new challenges, ranging from burgeoning new regulations that fill multiple binders on DeStaebler's desk to the quest for fresh management talent at a time when investment managers are bolting from mutual funds to run hedge funds. "Management succession is a key issue for us," says Central's Kidd. "Some firms have handled it well; others that haven't are now gone."

Indeed, the ranks of the Survivors' Club have thinned as the decades have passed. "Various and sundry things have happened to them," Ober says. In 1991, directors of Niagara Shares, another still-extant 1920s vintage fund, decided to throw in the towel, asking their investors to vote in favor of liquidating the fund, citing "the practical inability of a closed-end fund to raise new capital and the increasing costs of operating a relatively small internally-managed investment fund." The SEC called on independent directors to see if they could devise an alternative to the liquidation plan -- which involved hefty employee payoffs -- and the fund ultimately was acquired by Scudder, and rolled into one of its open-ended stock funds. (After a series of mergers, Scudder's funds are now part of Deutsche Bank's mutual-fund division.)

For Adams Express' Ober, the challenge is in making his fund a household name of sorts. When he took its helm in 1991, he commissioned a survey of its investor base. Two-thirds of the stockholders, he discovered, were over 65 years old. "I immediately panicked, thinking they're all going to die in the next 10 or 15 years, and we're going to be in trouble," Ober recalls. He feared that as his elderly investor base faded into eternity, those shares would be sold, but would find no ready buyers. That would have caused the fund's shares, traded on the New York Stock Exchange, to trade at an ever-greater discount to its net asset value -- its portfolio's market value.

Ober embarked on a marketing campaign, traveling to investor conferences nationwide to promote the fund. He inserted cards into annual reports, suggesting that shareholders fill them out with the names of friends or business associates they thought would be interested in hearing more about Adams Express. Last year, he commissioned another survey -- and the results were revealing.

"My shareholders turned out to be giving their holdings to their kids -- who were hanging on to them," he says. "It's become a family affair." Indeed, Ober says he recently received a call about the fund's investment policy from a shareholder whose father had bought its shares in 1937, and passed them on to his son 20 years ago. "That is our shareholder base, and maybe that's our secret strength," he says, laughing.

He and managers of other funds that have been around since 1929 are accustomed to going to shareholder meetings with more than a few grey heads. (One survivor's club member quips that at some, the number of shareholders is exceeded by the number of hearing aids.) For starters, many boards are composed of investment-industry veterans -- only three of the 10 directors of General American are under 70, for instance.

"There are a lot of shareholders who have been with us for decades," says Heath McLendon, now chairman of the research-equity operating committee at Smith Barney, and former chairman of the firm's mutual-fund division, including the
Salomon Bros. Fund,
another 1929 vintage closed-end. The shareholder base of such funds is far more outspoken than those of modern open-ends. Michael Kagan, the current manager of the Salomon Bros. Fund, is shocked by the amount of feedback he receives; he hadn't gotten a single letter from a shareholder during the five years he ran mutual funds at Fidelity Investments. "When I do well, they write and praise me; when the market goes down, they write and yell at me," he says.

The managers among the septuagenarian survivors concur that one of their big advantages is that the closed-end structure of their funds gives them a pool of permanent capital to invest. They don't have to struggle to invest a sudden inflow of new cash, nor are they forced to dump shares to meet a wave of redemptions. For Kidd, this means the freedom to follow Central's 50-year-old policy of taking relatively concentrated positions in a handful of stocks$ , no more than about two dozen at any one time, and waiting years, even decades, for those bets to pay off.

Members of the Survivors' Club have made errors, of course. Kidd says he stayed at the technology-stock party of the early 1990s too long, allowing tech stocks to become too big a portion of the portfolio. And at Adams Express, Ober says, wincing: "I've got scorch marks on my fingers from the technology bust of 2000," even though he says he steered clear of the dot-coms.

Although the ranks of open-ended mutual funds have soared in the past two decades, the number of closed-end funds has returned to near their post-crash peak relatively recently, says Don Cassidy, senior research analyst at Lipper in Denver.

Cassidy notes that the nature of that universe has changed irrevocably. "Now about 75% of the closed-end funds are bond funds, particularly municipal-bond funds, because the structure is well-suited to those investments," he says. That makes the Survivors' Club a still more unique group with every year that passes. Anyone aiming to launch a stock fund is likely to opt for an open-end structure or even an exchange-traded sector fund. "There aren't even very many analysts left who cover this universe, and that's a shame," Cassidy says.

Miami-based Thomas J. Herzfeld, one of a handful of independent advisers who tracks closed-end funds, remains a fan. He questions newfangled ideas like managed-distribution policies, a way for newer funds to boost their yields to investors. (A managed distribution is a pledge to pay a high yield, say 8%, annually, regardless of fund's actual income.) "I recommend that people look at funds like Tri-Continental or Salomon as proxies for the broad stock market," Herzfeld says. "They have among the lowest expense ratios, they trade at discounts that make them look like bargains, and they tend to be well-managed. Plus, they have shown their ability to survive adversity."

Indeed, Herzfeld is such a big fan of the Survivors' Club that when his Great Dane had a litter of puppies more than a decade ago, he registered them with the American Kennel Club under the names of many of the 1920s vintage funds that still existed -- Tri-Continental, Central, Salomon and so on. "A lot of those puppies have now passed on, but the funds are still alive," he notes.

Correction and Amplification:

In "The Survivors' Club," Douglas Ober, chairman and chief executive of Adams Express, was identified with Tri-Continental, another closed-end fund. Ober's affiliation was correct in the first reference to him.

SUZANNE McGEE, a New York-based free-lance writer, specializes in investment and business topics.

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